Construction Industry Falling Like Dominoes

construction worker falling

As Australia’s construction industry remains in contraction, construction companies are experiencing the repercussions with job losses, insolvencies and long lists of debtors.

In last month’s Australian Industry Group’s Performance Index, results showed that low demand and slow conditions, particularly in the residential and commercial construction sub-sectors, continued with house building in particular reaching its lowest level in six months.

In a recent Australian Industry Group press release, AIG Director Public Policy, Peter Burn, said, “Large parts of the national construction industry remained stuck in the doldrums. Very weak conditions continue in the house and apartment building and commercial construction sectors and this is flowing on to a cross-section of service and manufacturing businesses. Engineering construction also softened during March but from a much more robust base than the rest of the industry. The further fall in new orders points to a continuation of flat conditions over the coming months.”

In the same release, Housing Industry Association Chief Economist, Harley Dale, said “There is an unequivocal deterioration underway in the non-resource domestic economy in 2012. As a bellwether industry, residential construction is clearly highlighting this fact with the rate of decline in the detached house and apartment sub-indices of the Australian PCI accelerating in March. Furthermore, new orders for house building fell in March to their lowest level in six months. It was time to act some time ago, but nothing has happened. A 50 basis point cut in interest rates is required in May, while Federal and state governments need to get on with the job of boosting new housing supply,” Mr Dale said.

As a result of the downturn, industry suppliers are feeling the stress of non-paying customers which is causing major headaches. Geoff Considine of G.M.C Plumbing was quoted in the Sydney Morning Herald, “Every company that you work for these days are virtually running that close to the point of receivership… that’s how they operate their businesses.”

building house

This is seen in the case of Kell and Rigby who went into liquidation after over 100 years of service. The company, whose creditors will not receive anything of the $16.18 million they were owed, may have been insolvent since 2009 according to professional advisory firm, PPB Advisory.

Honan Insurance Group’s Terry Phillips, Director Trade Credit and Surety, understands the dire position of the industry and advises suppliers to the building and construction industry to consider the “domino effect” of these company failures. The flow on of cash flow problems down the supply chain caused by the failure of one business will ultimately effect a number of suppliers and in turn their suppliers.

Businesses need to be alert to the early warning signs if and when they have customers suffering financial strain. These early warning signs include a slowdown in payments, increased requests for payment extensions and management changes or resignations. The loss or failure of a major customer can also be a trigger.

There are a number of options open to suppliers to protect themselves from losses. Close monitoring of payments, regular credit checks of major customers or Trade Credit Insurance are all ways a business can ensure that they are not caught by the unexpected failure of a customer.

Trade Credit insurance involves regular monitoring by the insurer of the financial position of the customers of their insured clients. It also restores cash flow through the claim payment when a customer or holder of the insurance policy has a Receiver appointed.

“This is an insurance product that can restore confidence in uncertain economic times” says Mr Phillips.

By Jacqueline Romero
Honan Insurance Group
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